You are on page 1of 20

Accounting

(IAS)
Level 3

Model Answers
Series 2 2008 (Code 3901)
Vision Statement
Our vision is to contribute to the achievements of learners around
the world by providing integrated assessment and learning services,
adapted to meet both local market and wider occupational needs
and delivered to international standards.

© Education Development International plc 2008 Company Registration No: 3914767


All rights reserved. This publication in its entirety is the copyright of Education Development International plc.
Reproduction either in whole or in part is forbidden without written permission from Education Development International plc.

International House Siskin Parkway East Middlemarch Business Park Coventry CV3 4PE
Telephone: +44 (0) 8707 202909 Facsimile: + 44 (0) 24 7651 6505
Email: enquiries@ediplc.com
Accounting (IAS) Level 3
Series 2 2008

How to use this booklet

Model Answers have been developed by Education Development International plc (EDI) to offer
additional information and guidance to Centres, teachers and candidates as they prepare for LCCI
International Qualifications. The contents of this booklet are divided into 3 elements:

(1) Questions – reproduced from the printed examination paper

(2) Model Answers – summary of the main points that the Chief Examiner expected to
see in the answers to each question in the examination paper,
plus a fully worked example or sample answer (where applicable)

(3) Helpful Hints – where appropriate, additional guidance relating to individual


questions or to examination technique

Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success.

EDI provides Model Answers to help candidates gain a general understanding of the standard
required. The general standard of model answers is one that would achieve a Distinction grade. EDI
accepts that candidates may offer other answers that could be equally valid.

© Education Development International plc 2008

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise
without prior written permission of the Publisher. The book may not be lent, resold, hired out or
otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is
published, without the prior consent of the Publisher.

Page 1 of 18
Page 2 of 18
Accounting (IAS) Level 3
Series 2 2008
SECTION A
(Answer Questions 1 and 2 in Section A – Compulsory)

QUESTION 1

Rosni makes and sells wooden toys. For the year ended 28 February 2008 she provides the following
information:

(1) The net book value of fixed assets at the year end amounted to $200,000 prior to the year's
depreciation charge of 15%
(2) The inventory at 1 March 2007 was $250,000 and at the 28 February 2008 had increased in
value by 40%
(3) The inventory turnover ratio, based on average inventory, was 3 times
(4) The gross profit margin was 50%
(5) The receivables’ collection period was 2 months
(6) The return on capital employed ratio based upon her year-end capital of $600,000 was 30%.
Year end capital does not include a long term loan taken out in November 2007
(7) The current ratio was 4:1
(8) The acid test ratio was 2:1
(9) Wages represented 30% of sales
(10) Advertising represented 15% of cost of sales
(11) Rosni’s drawings for the year, all in cash, were $125,000.

REQUIRED

Prepare for Rosni in as much detail as possible:

(a) An Income Statement for the year ended 28 February 2008


(10 marks)

(b) A Balance Sheet at 28 February 2008. You may assume that current liabilities
comprise trade payables only.
(10 marks)

(Total 20 marks)

3901/2/08/MA Page 3 of 18
MODEL ANSWER TO QUESTION 1

Rosni
Budgeted Income Statement
for the year ended 28 February 2008

$ $

Revenue 1,800,000

Cost of sales:
Opening inventory 250,000

Purchases 1,000,000
1,250,000

Closing inventory 350,000


900,000
Gross profit 900,000

Expenses
Depreciation (200,000 x 15%) 30,000

Wages (1,800,000 x 30%) 540,000

Advertising (900,000 x 15%) 135,000

Sundries (R) 15,000


720,000
Net profit 180,000

3901/2/08/MA Page 4 of 18
MODEL ANSWER TO QUESTION 1 CONTINUED

Balance Sheet at 28 February 2008

Assets $ $
Non-current Assets (200,000 - 30,000) 170,000

Current Assets
Inventory 350,000

Receivables 300,000

Bank 50,000

700,000
Total assets 870,000

Capital

Opening Balance 545,000


Add: Net Profit 180,000
725,000
Less: Drawings 125,000
600,000

Non-current liabilities

Loan 95,000

Current liabilities
Payables 175,000
870,000

3901/2/08/MA Page 5 of 18
MODEL ANSWER TO QUESTION 1 CONTINUED

Workings:

Income Statement
$
Opening Inventory 250,000
+ 40% 100,000
Closing inventory 350,000

Average inventory therefore $250,000 + $350,000 divided by 2 = $300,000

Cost of sales therefore average inventory x inventory turnover = $900,000

Sales therefore $900,000 x 100% = $1,800,000


50%

Net profit is capital employed at year end of $600,000 x 30% = $180,000

Cost of sales less depreciation, wages and advertising = $195,000

Sundry expenses therefore $195,000 less net profit of $180,000 = $15,000

Balance Sheet

Current ratio = 4:1

Liquidity ratio = 2:1

Inventory therefore represents the difference of 2

Inventory of $350,000 divided by 2 must therefore equal payables of $175,000

Receivables equals 2 months of sales 1,800,000 x 6 = $300,000


12

Current Assets are Current Liabilities of $175,000 x 4 = $700,000

Bank therefore $700,000 less inventory of $350,000 and receivables of $300,000


= $50,000

Non-current assets + Net current assets = $695,000

As year end capital only totals $600,000, the difference of $95,000 must be the loan

3901/2/08/MA Page 6 of 18
SECTION A CONTINUED

QUESTION 2

The final accounts of Cempaka, a private company, in respect of the year ended 30 September 2007
were produced and presented to the auditors. These accounts revealed a gross profit of $1,013,750,
a net profit of $208,400 and net current assets of $214,500. During the course of the audit it was
discovered that inventory taking had taken place one week after the year-end, on the 7 October 2007.
The inventory counted at that time was valued at $165,000 and this figure was used in the preparation
of the final accounts.

Analysis of the relevant ledger accounts showed that, during the week's delay, the following
transactions had taken place:

(1) Sales, at selling price, $78,000 of which $12,000 had yet to be delivered to the customers at 7
October
(2) Purchases, at cost, $18,000, all received
(3) Returns inwards $4,500, all received
(4) Returns outwards $3,750, all despatched.

Cempaka determines all selling prices by using a mark-up of 50%.

In addition it was discovered that:

(5) Goods on sale or return had been invoiced to the customer at the selling price of $1,200. The
customer has still to indicate his intention with regard to the goods
(6) Included in the inventory valuation at cost price were damaged goods, which had been purchased
for $13,000. These were sold in November 2007 for $9,000 after paying repair costs of $875
(7) One of the inventory sheets used on the 7 October had been under-added by $5,000
(8) Included in the inventory valuation of $165,000 was the company's office stationery inventory,
costing $9,000. Between the 1 October and the 7 October, it was estimated that 25% of the
stationery inventory existing at 30 September had been used.

REQUIRED

(a) Calculate the corrected valuation of the inventory of goods for resale for Cempaka at 30
September 2007.
(12 marks)

(b) Using your answer to (a) above, calculate the corrected figures of Cempaka in
respect of gross profit and net profit for the year ended 30 September 2007 and the
net current assets figure at 30 September 2007.
( 8 marks)

(Total 20 marks)

3901/2/08/MA Page 7 of 18
MODEL ANSWER TO QUESTION 2

(a) Original inventory valuation 165,000

Add Deduct
$ $

1 Sales 78,000
Less: 12,000
66,000 x 100 44,000
150

2 Purchases 18,000

3 Returns inwards 4,500 x 100 3,000


150

4 Returns outwards 3,750

5 Sale or return 1,200 x 100 800


150

6 Damaged goods

Cost 13,000
Less: NRV
Selling 9,000
Repairs 875
8,125
4,875

7 Underadded inventory sheet 5,000

8 Stationery inventory 9,000

53,550 34,875

18,675
Revised inventory valuation 183,675

3901/2/08/MA Page 8 of 18
MODEL ANSWER TO QUESTION 2 CONTINUED

(b)
Gross Net Net Current
Profit Profit Assets
$ $ $

Original 1,013,750 208,400 214,500

Add:

Stationery inventory 9,000


0.75 nil 12,000 12,000

Inventory adjustment 18,675 18,675 18,675


1,032,425 239,075 245,175
Less:

Sale or return 1,200 1,200 1,200

1,031,225 237,875 243,975

3901/2/08/MA Page 9 of 18
SECTION B
(Answer any THREE questions from Section B)

QUESTION 3

The following Balance Sheet was produced for Saad, a private company, at 31 March 2008:

ASSETS NBV
Non-current assets $ $
Freehold land 1,000,000
Plant & equipment 500,000
Motor vehicles 250,000
1,750,000
Current assets
Inventory 280,000
Trade receivables 425,000
Bank 125,000

830,000
Total assets 2,580,000

EQUITY AND LIABILITIES

Capital and Reserves


250,000 Ordinary Shares of $1 each 250,000
750,000 5% Preferred Shares of $1 each 750,000
Accumulated profits:

Balance b/d 600,000


Profit for year 310,000
910,000
Equity 1,910,000

Non current liabilities


8% Debentures 500,000

Current liabilities
Trade payables 170,000
Total equity and liabilities 2,580,000

Other information relating to the year ended 31 March 2008:


Sales were $2,775,000 (of which $275,000 were for cash)
Purchases were $1,825,000 (of which $325,000 were for cash)
Inventory at 1 April 2007 cost $270,000
No dividends had been paid.

REQUIRED:

(a) Calculate, for the year ended 31 March 2008, the following ratios to two decimal places:

(i) Inventory turnover (based on average inventory)


(ii) Working capital
(iii) Acid test
(iv) Receivables collection period (in days)
(v) Payables settlement period (in days)
(vi) Return on capital employed (profit before interest divided by closing capital)
(vii) Gearing (fixed interest funding divided by total funding).
(10 marks)

3901/2/08/MA Page 10 of 18
QUESTION 3 CONTINUED

The following errors were subsequently discovered:

(1) Items of inventory, valued at cost of $15,000 and included in the inventory valuation at 31 March
2008, had been damaged by fire earlier in the year and should have been written off
(2) A receivable was declared bankrupt on the 1 March 2008 but his sales ledger balance of $25,000
had been included in receivables at 31 March 2008
(3) The freehold land was professionally re-valued at $1,500,000 in February 2008 but no entries had
yet been made in the books.

REQUIRED

(b) Calculate, to two decimal places, the following ratios after correcting the above errors:

(i) Inventory turnover


(ii) Receivables collection period
(iii) Return on capital employed (using closing capital)
(iv) Gearing (fixed interest funding divided by total funding).
(8 marks)

(c) Briefly explain the significance of the change in the gearing ratio.
(2 marks)

(Total 20 marks)

3901/2/08/MA Page 11 of 18
MODEL ANSWER TO QUESTION 3

CALCULATION ANSWER
(a)
[i] 270,000 + 1,825,000 - 280,000 6.60 times
(270,000 + 280,000)/2

[ii] 830,000 4.88:1


170,000

[iii] 830,000 - 280,000 3.24:1


170,000

[iv] 425,000 x 365 62.05 days


2,775,000 - 275,000

[v] 170,000 x 365 41.37 days


1,825,000 - 325,000

[vi] (310,000 + 40,000) x 100 14.52%


1,910,000 + 500,000

[vii] (750,000 + 500,000) x 100 51.87%


2,410,000

(b)
[i] 270,000 + 1,825,000 - 265,000 6.84 times
(270,000 + 265,000)/2

[ii] (425,000 -25,000) x 365 58.40 days


2,500,000

[iii] (350,000 - 40,000) x 100 10.80%


2,410,000 - 40,000 + 500,000

[iv] 1,250,000 x 100 43.55%


2,410,000 + 500,000 - 40,000

(c) The company moves from a:

highly geared company to a less highly/low geared company and therefore with a lower
financial risk to ordinary shareholders

3901/2/08/MA Page 12 of 18
SECTION B CONTINUED

QUESTION 4

Alif, Meor and Jin commenced trading on the 1 January 2007 without the benefit of a partnership
agreement. The following balances were extracted from the books of the partnership, after completion
of the Income Statement for the year ended 31 December 2007:

$
Capital Accounts (representing money introduced on 1 Jan 2007):
Alif 300,000
Meor 150,000
Jin 150,000
Drawings:
Alif 50,000
Meor 40,000
Jin 32,500
Loan from Meor 60,000 (made on 1 Jan 2007)
Profit before interest 78,000

No provision had been made in the accounts for loan interest due to Meor.

There were no balances on the partners’ current accounts at the time this list of balances was
extracted.

REQUIRED

(a) Prepare the Partnership Appropriation Account for the year ended 31 December 2007.
(5 marks)

The partners entered into a partnership agreement from the 1 January 2008 on the following terms:

(a) Alif, Meor and Jin would share profits and losses in the ratio 2:1:1 respectively
(b) Interest of 6% per annum would be paid on the loan from Meor
(c) Each partner would be entitled to interest of 8% per annum on capital
(d) Jin would be entitled to an annual salary of $20,000.

It was further agreed that the balance sheet value of inventory at 1 January 2008 should be increased
by $15,000 and the value of receivables at the same date reduced by $10,000. Goodwill was valued
at $160,000 although no goodwill account was to be created in the partnership books. All other assets
and liabilities in the Balance Sheet at 1 January 2008 were considered to be fairly valued.

REQUIRED

(b) Calculate the balances on the Capital Accounts of Alif, Meor and Jin immediately after
implementing the partnership agreement on 1 January 2008 and undertaking the required
adjustments.
(12 marks)

A partnership may be dissolved for many reasons other than poor trading conditions.

REQUIRED

(c) Give three of these reasons.


(3 marks)

(Total 20 marks)

3901/2/08/MA Page 13 of 18
MODEL ANSWER TO QUESTION 4

(a) Alif, Meor and Jin


Appropriation Account for the year ended 31 December 2007

(1 each) $
Net profit for the year (78,000 - 3,000) 75,000
$
Profit share:

Alif (1/3rd) 25,000


Meor (1/3rd) 25,000
Jin (1/3rd) 25,000
-75,000
0

(b) Alif Meor Jin


$ $ $

Balances at 31 December 2007 300,000 150,000 150,000

Adjustments: $
Goodwill 160,000
Inventory 15,000
Receivables -10,000
165,000

Shared (1:1:1) 55,000 55,000 55,000


355,000 205,000 205,000
Less: Goodwill (2:1:1) 80,000 40,000 40,000
Balances at 1 January 2008 275,000 165,000 165,000

(c)
Death of a partner
Bankruptcy of a partner
Partnership was formed for a fixed period which has now ended
Conversion into company
Insanity of a partner

3901/2/08/MA Page 14 of 18
SECTION B CONTINUED

QUESTION 5

The following information was extracted from the Balance Sheet of Sadd, a private company, at 31
December 2007:

$
Current liabilities
5% Debentures 1,500,000

Capital and Reserves:


1,000,000 $1 Ordinary Shares 1,000,000
500,000 6% $1 Redeemable Preferred Shares 500,000
Share premium 1,000,000
Accumulated profits 3,250,000

On 1 August 2007, Sadd had paid $1,500,000 to acquire 80% of the share capital of Rosni, a private
company. The following information was extracted from the balance sheet of Rosni at 31 December
2007:

Capital and Reserves:


$ $
1,500,000 $1 Ordinary Shares 1,500,000

Accumulated profits:
Balance at 1 January 2007 (200,000)
Profit for year 300,000
100,000
1,600,000
Rosni’s profit accrued evenly during the year.

REQUIRED

(a) Calculate the goodwill arising on acquisition.


(4 marks)

(b) Calculate the minority interest at 31 December 2007.


(1 mark)

(c) Calculate the balance on the consolidated income statement at 31 December 2007.
Amortisation of goodwill is to be ignored.
(3 marks)

On the 1 January 2008 Sadd redeemed, from existing cash resources, the debentures at a premium of
10% and purchased 100,000 of its own ordinary shares at a price of $1.10 each. These ordinary
shares were originally issued at par.

REQUIRED

(d) Journal entries, without narratives, to record the above transactions. The company did
not make use of a debenture redemption account but a share purchase account was
used. The company wishes to maximise its distributable reserves.
(12 marks)

(Total 20 marks)

3901/2/08/MA Page 15 of 18
MODEL ANSWER TO QUESTION 5

(a) Goodwill arising on acquisition $


Cost of investment 1,500,000

Less: Share capital 1,500,000


Accumulated Profits - 1 Jan -200,000
Profit 1 Jan -1 Aug 300,000 x 7 175,000
12
1,475,000 x 80% 1,180,000
320,000

$
(b) Minority interest at 31 December 2007 (1,600,000 x 20%) 320,000

(c) Consolidated Income Statement at 31 December 2007 $

Income Statement of holding company 3,250,000


Add:
Profit earned by subsidiary belonging to parent

(300,000 x 5) x 80% 100,000


12 3,350,000

(d) $ $

Debenture Account 1,500,000


Share Premium Account 150,000
Bank Account 1,650,000

Ordinary Share Capital Account 100,000


Share Purchase Account 100,000
Income Statement 100,000
Capital Redemption Reserve Account 100,000
Income Statement 10,000
Share Purchase Account 10,000
Share Purchase Account 110,000
Bank 110,000

3901/2/08/MA Page 16 of 18
SECTION B CONTINUED

QUESTION 6

The following were the net book values of Along’s non-current assets at 1 January 2007:

Notes $

Office building (1) 995,000


Lorry (2) 151,200
Office equipment (3) 30,000
Leasehold factory (4) 2,850,000
Machinery (5) 160,000

Notes

(1) Purchased on 1 September 2000 for $1,375,000. It is being depreciated on a straight line
basis over 20 years and is expected to have a residual value of $175,000
(2) Purchased on 1 January 2005, it is being depreciated on a reducing balance basis at 40% per
annum
(3) Bought on 1 January 2004, it is being depreciated using the sum of the years’ digits method
over a five year period and assuming no residual value
(4) Purchased on 1 January 1995 on a fifty-year lease, for $3,750,000. It is being depreciated on
a straight line basis
(5) This is being depreciated on a machine hour basis, assuming no residual value. When
purchased the machine was estimated to have a productive life of 20,000 hours On 1 January
2007 its remaining capacity was 8,000 hours and during the year ended 31 December 2007 a
further 2,000 hours were used.

REQUIRED

(a) Calculate the depreciation charge for each of the five assets listed above for the
year ended 31 December 2007.
(7 marks)

(b) Copy the following extract into your answer book and complete the missing financial
information:

Along
Balance Sheet extract at 31 December 2007

$ $ $
Non-current assets Cost Accumulated Net Book Value
Depreciation
Office building 1,375,000 ? ?
Lorry ? ? ?
Office equipment ? ? ?
Leasehold factory 3,750,000 ? ?
Machinery ? ? ?

(13 marks)

(Total 20 marks)

3901/2/08/MA Page 17 of 18
QUESTION 6
Syllabus Topic: 2.3.11
(a)
Asset Calculation Depreciation

$
[1] Freehold office 1,375,000 - 175,000 60,000
20

[2] Lorry 151,200 x 40% 60,480

Capital cost: 151,200 252,000 420,000


0.6 0.6

[3] Office equipment 30,000 x 15 x 2 20,000


315 15

Capital cost: 30,000 x 15 = 150,000


3

[4] Leasehold factory 3,750,000 75,000


50

[5] Machinery 160,000 x 20,000 x 2,000 40,000


8,000 20,000

Capital cost: 160,000 x 20,000 = 400,000


8,000

(b)
Cost Accumulated NBV
Depreciation
$ $ $

Freehold office 1,375,000 440,000 935,000


Lorry 420,000 329,280 90,720
Office equipment 150,000 140,000 10,000
Leasehold factory 3,750,000 975,000 2,775,000
Machinery 400,000 280,000 120,000

3901/2/08/MA Page 18 of 18 © Education Development International plc 2008

You might also like